One of the most frequently asked questions that we are asked is “should I salary sacrifice a car or in the case of business owners, should I be buying a car to save tax?” The short answer is usually not, and if you cannot produce a proper log book to support the business use then beware. Not only will you miss out on the tax deduction, you will actually end up paying tax.
Here are the facts
In the absence of a log book the ATO calculates the private use/ fringe benefit of a car at 20% of the value of the car inclusive of GST. If for example you purchased a car for $ 40,000 incl GST, then the private/taxable component is deemed to be $ 8,000. Now let’s look at the tax deductions:
Motor Vehicle Costs Amount
Depreciation based on prime cost 12.5% of 36,363.64 (net of GST) $4,545
Interest over 4 years with a 40% residual at 6% pa $1,680
Petrol for 15000km pa at 10ltr/100 $2,100
So the net tax deduction is $ 10825 - $ 8000.00 = $ 2,825.
Most people are paying either 34.5% tax or 39% tax in which case the average tax benefit is between $975 and $ 1,102 per annum. The problem is exaggerated if the car’s cost is over the depreciation cost limit of $57,581, then the tax deductions are capped at this level, but not the fringe benefit/private use. You could easily end up in a tax payable position.
Keep in mind that an individual can claim a tax deduction based on the per kilometer method at 66 cents per kilometer up to 5000km p.a per car or $ 3,300 p.a, higher than the tax benefit outlined in the above example. The same rate applies to all cars regardless of age. You do however have to justify the kilometers were for legitimate business travel.
There are ways to minimise the tax impact and lessons to be learnt:
Never assume buying a car in your company or trust name is the right way;
Never buy a car for tax purposes only;
Avoid buying new cars and consider near new or up to 2 years old;
Don’t change cars unless you have to. The opportunity cost of buying a car with finance is equivalent to servicing a $ 300,000 mortgage; and
Always talk to us before you buy any car.
If you have an existing car owned outright the running costs are only $ 4,600.00 which is the equivalent to servicing a $ 115,000 mortgage. Therefore the opportunity cost of a new car is equivalent to servicing a $200,000 mortgage (approximate).
Consider this: Invested sensibly the same $ 200,000 will grow and its common for a good investment to double every 10 years, whereas a car’s worth over the same time would be negligible.
The conclusion has to be, that unless you have a log book with a high business percentage and its current I.e. less than 5 years old and valid, then the tax benefits are likely not worth chasing.
The figures used above are by way of example only. Please contact us for any further questions on 07 3256 0822.